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August 21, 2015


Yesterday the Dow fell some 358 points which Wall Street hacks immediately attributed to “concerns with the Chinese economy.” If it’s not the Chinese economy, then it’s the fear of Greek default and/or withdrawal from the euro (the Greek prime minister just resigned as I write this), the fear that our minimum (aka “coolie” wage) will be increased, or that some Saudi sheik has a cold which prompts an increase (or decrease) in per barrel price of oil or some other such excuse (take your pick or come up with a new one for Wall Street’s dartboard) for Wall Street’s lack of performance (though in this latter case we should be unconcerned with the sheik’s health since we now only import 27% of our petroleum due to successes in domestic oil discovery, fracking etc.).

Parenthetically, it is not surprising that Big Oil’s lobbyists are already beating the drums to amend or reverse current law against export of American oil. I think we are still 27 percent short of that day, and that such lobbying has more to do with Big Oil’s bottom lines than with America’s energy security. Even though the costs of transporting American oil to domestic refineries may be less than tanker-transport of oil from the Middle East, Big Oil can get by with wage scales, environmental costs and the like in other such venues in, for instance, Nigeria and Ecuador, than it could pull off here. It is clear to me that Big Oil’s chief concern is profitability and that America’s energy’s security is 11th on its list of 10.

There seems to be some unspoken conspiracy among global stock markets to attribute sudden drops in  their respective stock market values with what happens somewhere else in what I think is a contrived  diversion from the truth, i.e., that their equities are overpriced and that we are in another “stock bubble” such as the one that preceded the Great Depression and the one around the end of the 20th century which, in concert with Bush’s wars and tax cuts to the rich, gave us Bush’s Great Recession.

Thus the Japanese or British stock markets could rise or fall depending not upon their domestic economic growth and performance and capital gains potential to investors but, for instance, on some reported tremor of non-growth in the American or German or French economies. The Wall Street cover for this is that we are in a globalized economy, and that one could only expect ups and downs in one economy to be reflected in other and interconnected economies. There is some (albeit) superficial truth to that view, particularly where multinational and other such corporations have a direct investment in foreign corporations, but the fundamental problem in my view (and one where angels may fear to tread – and I am not an angel) is that all the world’s stock markets are overpriced, their “returns” increasingly based on corporate boardroom shenanigans and not real performance, on buybacks and accounting gimmicks etc., and not on increasing sales, reducing costs etc., especially among those corporations involved in monopoly pricing where (in keeping with economic theory) efficiency is unnecessary due to lack of competition. This is “free market” economics as envisioned by Adam Smith and others where “pure competition” (which doesn’t exist except in theory) is designed to bring ultimate corporate profits to zero? Hardly, and Wall Street’s attempts to paint nowadays slash and burn pursuit of profit with the theories of such classical economists is deliberately misleading and academically disgusting.

I have read several pieces where a particular corporation has experienced a losing “down year” in which sales were down and costs were up but still saw its stock prices go up! How could this happen? Aren’t stock prices supposed to go down when the company has lost money? Wouldn’t that be a normal response to the lack of performance by such a corporation? Not necessarily, and one of the reasons is because there is an epidemic of buybacks by corporate America these days. In board-approved buyback situations, the corporation buys back its own stock, stock that cannot thereafter vote at shareholder conclaves and cannot be the recipient of dividends.

This board resolution of buyback, of course, enhances the voting rights of current stockholders and their relative share of dividends, if any, and the value of their stock in terms of capital gains potential may go up even though the corporation may have dismally performed for the year, and to make things worse from  the point of view of non-owners of such stock (you and me), if the company borrowed money to effect the buyback, the interest on such loans is deductible, which means that you and I are financing such corporate welfare to some extent since we have to make up what such a losing corporation deducts from income either in increased taxes or liability to pay future budget deficits. (Corporate welfare comes in many disguises; there are many more too numerous to list which are ensconced in our internal revenue and bankruptcy codes due primarily to Wall Street’s takeover of our political process).

I have recently blogged on the futility of the Chinese government’s intervention in its stock market gyrations (which we are told led to yesterday’s international down stock markets amid Chinese promises to keep intervening), but we are doing the same thing here though in indirect fashion with our virtually Fed-approved zero interest rates, precarious leveraging ratios and other such weak regulatory controls. The Chinese, though via mistaken policy, are more honestly and openly attacking the problem of weakened stock values than we are in our respective efforts to prove that our systems work. We here are more inclined to work relatively undercover to intervene (or not intervene) in our equities market via shifting rules and enforcement emphasis (both subject to political interference via Wall Street).

The Chinese are finally being welcomed into the downside of the wonderful world of capitalism with their slowing economy irrespective of their official stance of state socialism and, as I have written just recently, their attempts to corral the beast will fail, just as many of our less visible attempts (see the Fed policies) have failed. Handing out money in China or not collecting it here will not corral the beast; that only treats the symptoms and not the cause or causes of international slowdown and is subject in time to Piketty’s “fundamental contradiction of capitalism” where, as currently practiced, is its own worst enemy and where its ultimate success (per Piketty) will lead to its own demise.

World-wide demand (and thus production) is slowing due to wage inequality, underperforming economies, increasing use of robots and artificial intelligence in supplanting human labor and a host of other built-in negatives which are accompanying our transition from an industrial to a digital economy. From a macro perspective, we in our blind pursuit of profit have not prepared for such negatives and our capital markets are reflecting our struggle to bridge the gap to this new economy. Whether capitalism as currently practiced can survive with or without public subsidy and whether here or in China or elsewhere in this global economy are questions yet to be answered. I think that a reformed and regulated form of capitalism can work, but I have no clue what will work 30 years from now. That will depend upon what happens in the interim, to which none of us is privy. Our task today is to try to influence what happens during this interim in positive fashion, hence this effort.    GERALD     E


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